Why Do Investors Rely on Low-Quality Investment Advice? Experimental Evidence from Social Media Platforms

Abstract

We report the results of a series of experiments showing that individual investors rely on low-quality investment advice from social media platforms, especially when the advice is negative. Our results also suggest reasons for investors’ reliance. Some investors believe that they should rely on the advice, suggesting that reliance on low-quality advice is sometimes due to a lack of knowledge about the advice’s predictive value. However, low-quality advice influences investment judgments even among investors who believe they should not and did not rely on the advice. This unintentional reliance on low-quality advice stems from a tendency to automatically accept information when it is initially provided. Prompting investors to consider the credibility of their information sources before they view low-quality advice reduces the advice’s influence. Our findings suggest that regulators interested in reducing investors’ reliance on low-quality advice should augment knowledge-oriented education with process-oriented interventions. Data Availability: Contact the authors. JEL Classifications: D83; D91; G41; M41.